CBO study examines policy options to reduce oil price volatility

Policies that reduce the US transportation system’s heavy reliance on petroleum products would more effectively shield consumers from volatile prices and supply interruptions in the long term than simply increasing US production, a new Congressional Budget Office study concluded. Higher vehicle fuel efficiency requirements and increased motor fuel taxes might be easier to implement than developing alternative fuels and their necessary distribution systems, it suggested.

The study, which CBO released on May 9, examined all forms of energy but concentrated on crude oil because of its history of price spikes in response to supply interruptions.

“The worldwide market for oil means that the demand for oil by consumers around the world will be satisfied with the least expensive oil, after accounting for transportation costs, quality, and trade sanctions, regardless of where it is produced,” it said. “Disruptions in oil production in one country will cause the world oil market to readjust so that all countries and firms continue to receive oil at the new prevailing price.”

Increasing US production would put downward pressure on global oil prices once projects were operating, but several overseas producers, particularly members of the Organization of Petroleum Exporting Countries, likely would respond by trying to reduce their exports, the study said. More US production also would take pressure off consumers to move away from petroleum products for motor fuels, it added.

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A study by the Energy Security Leadership Council at Securing America’s Future Energy, which was released on May 8, reached a similar conclusion.

Beyond slogans

US Senate Energy and Natural Resources Committee Chairman Jeff Bingaman, who asked CBO to analyze factors important to US energy security in October, said the study illustrates why some energy policy debate slogans don’t reflect how global energy markets work, and consequently lead policymakers away from the most useful steps for improving US energy security.

“As many experts, and now CBO, have repeatedly observed, every barrel of oil that we avoid using in the US transportation sector makes our economy stronger, not to mention our personal pocketbooks, and less vulnerable to the volatility of the current marketplace,” he said.

“This is not to say that we shouldn’t keep increasing domestic production, and that the Obama administration should not move forward with its plans to bring even more supplies into the market,” Bingaman continued. “We lead the world in innovative exploration and production technology, and it is helpful to have more supplies on the world market. But the long-term solution to the challenge of high and volatile oil prices is to continue to reduce our dependence on oil, period.”

A spokesman for the committee’s Republican minority said that CBO’s analysis contained several appalling shortcomings. “These include the apparent belief that only half of the law of supply and demand has any effect,” said Robert Dillon, the committee’s GOP communications director. “Republicans strongly support using less oil, but we use approximately 20 million b/d and there is no immediate viable substitute.

“If using less oil makes our economy stronger and lowers oil prices, then certainly producing more American oil has similar benefits – plus it creates jobs and pumps money into our economy instead of OPEC,” he continued. “It’s distressing that CBO, of all entities, doesn’t grasp the positive impact of increasing the [gross domestic product] of the United States and lowering our trade deficit.”